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Transportation Costs

By Anonymous - Posted on 15 January 2012

In a physical distribution system, transportation function is concerned with the movement of goods from the factory to the end customer through a number of intermediaries.

In a typical distribution setup, the finished goods are shipped to the factory warehouse, from the factory warehouse, the goods are shipped to the distribution warehouses, from the distribution warehouses the goods are sent to local storage. From the local storage, the goods are sent to the final customers.

An efficient transportation system helps attain a high customer service level and contributes in gaining a competitive advantage by being cost effective in their operations. This requires transportation to understand and analyse the various costs of the system,
which further help in gaining economies of transportation by selecting the appropriate transportation mode, optimizing on the transportation capacity, transportation routes etc.,

The following are the costs associated with the transportation function :

Line – Haul Costs
Pickup and Delivering Costs
Handling Costs
Billing and Collection Costs

Goods move either directly from the shipper to the consignee or through a terminal. In the latter, they are picked up in some vehicle suitable for short-haul local travel. They are then delivered to a terminal where they are sorted according to destination and loaded onto highway vehicles for travel to a destination terminal. There they are again sorted, loaded on local delivery trucks and taken to the consignee.

Line-haul costs
When goods are shipped, they are sent in a moving container that has a weight and a volume capacity. The carrier has basic costs to move this container, which exit whether the container is full or not. These costs vary with the distance travelled, not the weight carried. For example, if for a given commodity, the line-haul costs is $3 per mile and the distance is 100 miles, the total line-haul cost is $300. if the shipper sends 50,000 pounds the total line-haul is the same as if 10,000 pounds is sent. However, the line-haul costs (LHC) per hundred weight (cwt.) is different.
LHC / cwt. = 300 / 500 (for 50,000 lb.) = $0.60 per cwt.
LHC / cwt. = 300 / 100 (for 10,000 lb.) = $3.00 per cwt.

Thus, the total line-haul cost varies with the cost per mile and the distance moved. However, the line-haul cost per hundred weight varies with the cost per mile, the distance moved and the weight moved.

The carrier has 2 limitations or capacity restrictions on how much can be moved on any one trip: the weight limitation and the cubic volume limitation of the vehicle. With some commodities, their density is such that the volume limitation is reached before the weight limitation. If the shipper wants to ship more, a method of increasing the density of the goods must be found. This is one reason that some products are made so they nest and others are shipped in an unassembled state.

Pickup and delivery costs
Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. The carrier will charge for each pickup and the weight picked up. If a shipper is making several shipments, it will be less expensive if they are consolidated and picked up on one trip.

Terminal handling costs
Terminal-handling costs depend on the number of times a shipment must be loaded, handled and unloaded. If full truckloads are shipped, the goods do not need to be handled in the terminal but can go directly to the consignee. If part loads are shipped, they must be taken to the terminal, unloaded, sorted and loaded onto a highway vehicle. At the destination, the goods must be unloaded , sorted and loaded onto a local delivery vehicle.

The basic rule for reducing terminal-handling costs is to reduce handling effort by consolidating shipments into fewer parcels.

Billing and collecting costs
Every time a shipment is made, paperwork must be done and an invoice made out. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.

Total transportation costs
The total cost of transportation consists of line-haul, pickup and delivery, terminal-handling and billing and collecting costs. To reduce shipping costs, the shipper needs to do the following:
- Decrease line-haul costs by increasing the weight shipped;
- Decrease pickup and delivery cost by reducing the number of pickups. This can be done by consolidating and increasing the weight per pickup;
- Decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments;
- Decrease billing and collecting costs by consolidating shipments

For any given shipment, the line-haul costs vary with the distance shipped. However, the other costs are fixed. The total cost for any given shipment thus has a fixed cost and a variable cost associated with it. In the latter, the cost per mile for short distances far exceeds that for longer distances.

The rate charged by a carrier will also vary with the commodity shipped and will depend upon the following:

- Value. A carrier’s liability for damage will be greater the more valuable the item;
- Density. The more dense the item, the greater the weight that can be carried in a given vehicle;
- Perishability. Perishable goods often require special equipment and methods of handling;
- Packaging. The method of packaging influences the risk of damage and breakage.

In addition, carriers have 2 rate structures, one based on full loads called truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less than carload (LCL). For any given commodity, the LTL rates can be up to 100% higher than the TL rates. The basic reason for this differential lies in the extra pickup and delivery, terminal-handling and billing and collection costs. Truckers, airlines and water carriers accept less than full loads but usually the railways do not accept.

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